Credit plays a critical role in the business engine driving US economy; easier access to credit enables businesses to grow and hire workers.
"There's a long history of using credit market measures as leading indicators of economic activity," UBS's Sam Coffin said. "Some of that relationship may be causal; some may not. For example, easier bank lending standards may lead faster lending and expanding activity. Or easier bank lending standards may reflect an improving economic outlook that also affects firms' hiring decisions. Whatever the causality, we have found that changes in bank lending standards and changes in investment-grade spreads tend to lead employment growth. "
Ever since the financial crisis, banks have kept lending standards loose, which many experts would argue has been very bullish for the economy.
But the Federal Reserve's new quarterly Senior Loan Officer Opinion Survey (SLOOS) suggests this favorable credit environment may be turning.
"Among the modest number of banks that indicated they had changed their [commercial and industrial] lending standards, reports of tightening were more frequent, especially for large and middle-market borrowers," the Fed said. "The domestic respondents that tightened either standards or terms on C&I loans over the past three months cited a less-favorable or more-uncertain economic outlook as well as worsening of industry- specific problems as important reasons."
This is the first such tightening since 2012, and the second time it's happened since the recession ended in June 2009.
The message was similar in the survey respondents' assessment of commercial real estate (CRE) loans.
"The modest net tightening in C&I and CRE lending, if continued, would point to an end to the multi-year easing in standards," Barclays' Michael Gapen said.
Federal Reserve
A net 6% reported tightening standards for C&I loans for large and middle-sized firms.
Before we go out into freak-out mode, it's important to recognize that it was only a "modest" number of banks that were tightening standards. Furthermore, survey respondents reported "having reduced costs of credit lines and narrowed loan spreads for both large and middle-market firms and smaller firms on net."
Having said all that, this is not encouraging during a time when much of the overseas and domestic economies appear to be slowing.
"The Fed's latest Senior Loan Officer Survey suggests that growth in business investment in equipment will remain muted over the remainder of this year," Capital Economics' Paul Ashworth said.
All of this points to further deceleration in job growth.
"Credit market conditions suggest some slowing in payroll growth," UBS's Coffin said. "Our credit/employment model suggests private payroll growth slowing from 185k per month this year to about 150k per month next year."
But again, it's not something to freak out about yet.
"That should still be enough to lower the unemployment rate relatively quickly (we estimate that about 100k per month in payrolls is consistent with a flat unemployment rate)," Coffin continued.